OUTLINE OF THE JFE GROUP

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JFE ENGINEERING CORPORATION

JFE Engineering is involved in a wide range of engineering fields including energy, environment and steel structure, with engineering positioned as one of the JFE Group's core business.

 THE FIRST MEDIUM-TERM BUSINESS PLAN

MAIN MEASURES
1. Number One strategy
2. Only One strategy
3. Management reform

CONSOLIDATED FINANCIAL TARGETS
  Billions of yen
  Actual
(approximate)
Actual Target* Plan's final target
(Years ended/ending
March 31)
2003 2004 2005 2006
Ordinary income 12.0  5.4  7.5  16.0 
Return on sales (ROS) 2.6%  1.6%  2.0%  4.0% 
* Estimated figures for the year ending March 2005 are those declared as of August 30, 2004.

 REVIEW OF EARNINGS FOR THE YEAR ENDED MARCH 2004
In the year ended March 2004, consolidated orders in the engineering business fell 8.1% year on year to ¥338.1 billion, on the back of shrinking public works, sluggish demand, falling prices, and the September 2002 spin-off of the shipbuilding business. Consolidated net sales dropped 25.8% to ¥339.4 billion, while consolidated operating income fell 75.6% to ¥3.1 billion and consolidated ordinary income declined 55% to ¥5.4 billion.

 FUNDAMENTAL STRATEGY
NUMBER ONE STRATEGY—EXPANDING MARKET SHARE
Our core products such as pipelines, waste incinerators and bridges display our technological prowess backed by extensive experience. Our marketing efforts are based on proactive proposals, and our goal is to secure and expand our market share. We aim to gain the top market share in the pipeline sector through improvements in our cost competitiveness, as well as new techniques and methods. On the other hand, in the incinerator field, we are striving to attain the top market share through our full line-up products. Moreover, to expand our market share in the field of bridges, we have been strengthening our marketing efforts related to small- and medium-sized projects in local communities.

ONLY ONE STRATEGY—DEVELOPING NEW MARKETS THROUGH DISTINCTIVE TECHNOLOGY
In order to ensure future growth in a mature domestic market and expand the market shares of our existing businesses, our most urgent task is to develop proprietary technologies that our competitors cannot imitate. Over the three years beginning with the year ended March 2004, we are investing two-thirds of our research and development budget (roughly ¥10 billion) in the development of new businesses and products. At the same time, we have established the Business/Project Planning & Marketing Department, an organization responsible for speeding up the process of developing new products and businesses from new technologies. In the field of energy and the environment, we plan to expand our long-term lifecycle-type business, which covers from plant construction, maintenance and operations.
  Specifically, we have been generating results from our research in areas such as air-conditioning system using clathrate hydrate slurry, natural gas transport and storage systems using natural gas hydrate, high-purity CNT tape synthesis technology. These are the areas where we are closest to marketing products featuring our Only One technologies.

THE DEVELOPMENT STATUS OF VARIOUS ONLY ONE TECHNOLOGIES
Air-conditioning system using clathrate hydrate slurry
 
Natural gas transport and storage systems using natural gas hydrate
 
High-purity CNT tape synthesis technology
This is a joint development project which we are pursuing together with the New Energy and Industrial Technology Development Organization (NEDO). We have already concluded extensive trials using experimental equipment and a test office building.   This method shows great promise for the economical development of small- and medium-sized gas fields. We have conducted bench-scale testing in a major research effort together with the former Japan National Oil Corporation (current JOGMEC).   We have developed multilayer CNTs using a proprietary production method. In a joint evaluation with Mie University, we have confirmed our multi-layer CNTs showed distinguished electrical discharge which is superior to that of top-class single-layer CNTs.

MANAGEMENT REFORM—INTRODUCING A DIVISION COMPANY SYSTEM
JFE Engineering has introduced a division company system, which comprises five division companies: Energy Industries Engineering, Environmental Industries Engineering, Water and Waste Water Engineering, Steel Engineering and Steel Structure Engineering. The system also includes two centers: the Machinery Center and the Solution Engineering Center. We are aiming to streamline each division's management and operations to improve profitability by clearly redefining the missions and roles of our subsidiaries and affiliates and regrouping them to ensure effective links with the relevant division companies and centers. This new concept will help each of the divisions function as an autonomous company, introduce performance-based evaluation system, clarify management responsibility, construct the operation system most appropriate for each business field, and improve our flexibility in responding to customer needs.

 OUTLOOK FOR THE YEAR ENDING MARCH 2005
In the year ending March 2005, we expect the order environment to remain harsh. Nevertheless, through our efforts to expand the line of new products based on our Only One and Number One strategies, we aim to boost consolidated orders by 12.4% to ¥380.0 billion, while raising consolidated net sales 9% to ¥370.0 billion. Despite continued severe downward pressure on our product prices, by increasing sales and cutting fixed costs, we aim to attain a consolidated ordinary income of ¥7.5 billion or more.

 STRENGTHENING OUR OVERSEAS BUSINESSES
—ESTABLISHMENT OF THE INTERNATIONAL BUSINESS DEVELOPMENT CENTER

While Japan's domestic market is mature, we expect to see continued strong growth in demand in markets in Asia, particularly in China, for energy, environmental solutions and steel structures. To make an active approach to these overseas markets, we established our International Business Development Center in April 2004. This organization is helping us to focus all of our management resources related to overseas businesses, increase the efficiency of our operations, exercise strict risk management, and pursue the necessary budgetary management. Excluding steel-related engineering, our overseas orders are now at the level of about ¥10.0 billion, but we aim to extend this figure to ¥20-30 billion by the year ending March 2006.
  Since the opening of the new center, a team of specialists has been working on its first major international project, a major gas pipeline in Indonesia. In the environmental field, we are planning a fresh marketing effort in China and Southeast Asia. To this end, we have decided to invest in a Chinese environmental facilities engineering firm, which aims to establish a marketing, manufacturing and purchasing base there. We have focused our goals and are making steady progress in developing our businesses in these markets.

 R&D SYSTEMS-ENGINEERING RESEARCH CENTER
One of the most important issues facing JFE Engineering is the exploration of new markets and the expansion of our sphere of business through the development of Only One technologies. JFE Engineering Research Center is our major research base for fulfilling that purpose. The Center supports the business activities of the JFE Engineering Group by taking responsibility for performance evaluation, analysis and trial runs of test plant facilities, as well as by developing new proprietary technologies that will lead to new businesses.

MAJOR RESEARCH THEMES IN ONLY ONE TECHNOLOGIES UNDER DEVELOPMENT
Target market Only One technology/product Description
Nanotechnology   Carbon nanotubes (CNTs)   The electrical discharge from high-purity tape CNTs is among the strongest in the world; CNTs may be used as parts and materials for power sources or field emission displays (FEDs).
Energy conservation/
CO2
  Air-conditioning system using clathrate hydrate slurry   Low-energy-consumption air conditioning system using a heat-converter catalyst, two to three times more efficient than cold water.
  New cooling exchange system   This system can collect factory exhaust gases with temperatures of 80°C or less, which are generally discarded, for heat exchange.
Energy   Natural gas transport and storage systems using natural gas hydrate (NGH)   The aim is to build a natural gas transport/use chain from overseas small- and medium-sized gas fields, based on highly efficient technology for manufacturing methane hydrate that uses rapid generation of micro-bubbles.
Solutions   Multi-purpose process-simulation technology   Creating simulators and operations simulation technology, enabling optimization and improved efficiency of process operations.
Wastewater treatment   Bioreaction simulation technology   The world's first practical simulation technology using a world-class activated sludge model, combined with a proprietary vector biofilm and equipment model.
Resource recycling   High-efficiency methane fermentation technology   High-efficiency methane fermentation technology, based on our own unique solubilization technology combining physiochemical treatment and biological processes, which is expected to work with manure, sewage sludge and kitchen waste.